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Investment Review – 2011

In retrospect and review 2011 can be summed up, in terms of my own investing activities, as one of the most boring I can remember. That’s not to say that 2011 was short on news, continued credit crisises and uncertainty, but nothing changed substantially in my approach or activities from what I had done in 2010.

Since beginning my investment journey in 2002 (at the age of 21) I’ve had ten years to accumulate an extensive knowledge of investing, practice a number of different approaches, develop an investing discipline and reflect on what I’ve learnt, gained and lost due to those experiences.

My basic investment discipline can be summed up in a few very short points:

• Invest only in companies you know, understand & research
• Concentrate on cashflow, dividends and Enduring ValueTM
• Diversify appropriately along different assets, sectors, regions & currencies
• Focus on capital preservation (never lose money)
• Don’t tinker with a portfolio that doesn’t require adjustments
• Avoid unnecessary risks
• Be consistent, never comfortable

Those seven basic principles are what I review each and every time I contemplate a new or continued move within my portfolios. They are simple, straight forward and most of all involve common sense.

Far too many investors fail to follow each and all of those principles appropriately and can end up harming their actual or potential returns. Successful investing never involves complacency. An investor should always be thinking ahead of the market (if they can) to protect against risk and the direction of their portfolio. As much as I admire my dividend growth portfolio (DivG) at present, I am prepared to make dramatic and drastic changes to its holdings if necessary. Those changes could be in response to a change in an individual company’s internal fundamentals, a change in external factors of the market or the need for something different to compliment the portfolio.

Examples of these types of moves were my sale of Research in Motion (RIM) shares back in May in response to the markets thrashing of its valuation and questionable changes in its operating fundamentals. Even with an established margin of safety in each of my valuation models, there are times when I will be wrong as an investor. What I’ve learnt from my mistakes is that when a stock becomes too cheap there’s often a reason you need to pay more attention to, rather than being arrogant and ignoring what the market is discounting.

What I failed to recognize in my fundamental analysis was that I needed to evaluate RIM on its two business units separately; business enterprise software & consumer products. Each time I priced RIM out on its future earnings and forward P/E I failed to recognize the weight the market would place on the performance of its consumer segment. Even though I feel that RIM has value, losing my margin of safety was not something I was comfortable with and I moved out of the position to protect my downside. I may be right or wrong in my pricing model, but there are other investments with less volatility and that pay a positive cashflow (dividend) I would rather place my capital with.

My Canadian Dividend Growth Portfolio (DivG) returned 10.1% in 2011 (including dividends). I’ve written many times before that I don’t benchmark my portfolio against any broad market indices because my portfolio isn’t representative of the broader market; instead its representative of my investing approach. Regardless the return of the S&P/TSX60 and broader S&P/TSX Composite indices were roughly -11.5% & -11.1% respectively in 2011.

Index investing is likely the most cost-effective and disciplined investing approach because investors concentrate on keeping costs to a minimum and performing as good as the overall market. Index investing exclusively doesn’t interest me because of the potential for negative returns. I believe, strongly, that I can protect my capital better with a concentrated, yet balanced, portfolio following the seven basic principles above then to simply leave my capital in the markets overall to perform on par. Positive returns are what really count. My focus isn’t on returning 20% or greater year after year, but to remain positive on a consistent basis. In 2010 I returned 23.52% on my DivG portfolio which was a respectable accomplishment, but in a year when the main indices lose by double digits I’m happy with my 10% return even if approximately 4.0% came from dividends.

The validation of this investing approach is examining my dividend cashflow year over year (YoY). From 2009 to 2010 my yearly dividends increased by 8.7% meaning in 2010 I was receiving 8.7% more in dividends than I did the year before. With $100 in dividends that only means $8.70 more, but on $10,000 in dividends I could receive $870 in additional funds. From 2010 to 2011 my yearly dividends increased another 11.1% (19.4% over the past 24 months!!!).

The true beauty of this investing approach is that I’ve been able to accomplish this feat by almost exclusively re-investing the dividends I receive each month back into more shares of dividend paying stocks.


Other than dropping RIM from the portfolio the only minor change I made in 2011 was my venture into the common shares of Enbridge (ENB).

In October of 2008 I purchased a decent set of Enbridge preferred shares (ENB.PR.A) for a few reasons: investors were shedding Canadian preferred shares at capitulation prices simply to preserve capital, the shares paid a dividend of $2.75 per share and it was a far more cost effective investment in Enbridge than the common shares which were trading at a premium to the pipeline group.

I’ve rarely seen ENB common shares as either cheap or affordable, but at times you pay for quality and I wasn’t comfortable waiting for an opportunistic entry point that might not happen for another few years.

My higher allocation to AltaGas (ALA) in my energy segment worked out very well (up 47% YTD), Saputo (SAP) continues to perform at my expectations and I continue to stalk the preferred share market in Canada for opportunities as I would like to bulk up my preferred allocation to 15.0% from its current 10.7% of the portfolio.

Happy and successful investing in 2012!

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